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To predict what your costs will be if you change your production volume, you have to find your variable costs. You can then find the variable cost per unit and estimate what your costs will be for a changed number of units produced. Several methods allow you to estimate the variable costs based on overall costs from your production line.

Analysis of Production

You can identify fixed and variable costs in your accounting data according to your experience with the process. Fixed costs are those that don't vary with the production volume, such as heating the building and insurance. Variable costs are those that increase and decrease with changes in the number of items produced, such as raw material used in manufacturing, parts purchased and hourly labor. When you have accurate accounts and are familiar with your production, you can add the total variable costs, divide by the number of items produced and get an estimate for the variable cost per item.

Graphing a Scatter Plot

Your records show total costs and number of items produced for several accounting periods. Ideally, you can find many such periods, such as the number of items produced and the total cost for each month of the past year. If you plot this information on a graph with the costs on the y-axis and the number of items on the x-axis, the points form an approximate straight line. The value where the line intersects the y-axis is the fixed cost, and the slope of the line is the variable cost per unit.

To calculate the slope, draw a horizontal line from the end point of your sloping line to the y-axis. Subtract the fixed cost from the y-axis value at the horizontal line. Divide the result by the x-axis value you get by drawing a vertical line from the end point to the x axis.

High-Low Method

A simpler method is to base your estimates on the highest and lowest production volumes and their associated costs. For example, you could use the highest and lowest monthly production volumes of the past year. Subtract the total cost of the lowest production volume from the cost of the highest production volume. Subtract the number of items in the lowest volume from the number in the highest volume. Divide the resulting cost by the calculated volume to get an estimated cost per unit.

Linear Regression

Linear regression establishes a linear equation of the form y=mx+b from the available data. If y is the cost variable and x the production volume, the fixed cost is b and the variable cost is m. To find m from the 12 monthly cost and production values, calculate the sum of the production volumes, the sum of the squares of the production volumes and the sum of the costs, calling them X, X2 and Y respectively. Multiply each production value by its cost and add the results, calling the total XY. Divide the square of X by 12, subtract the result from X2 and call the answer SXX. Divide X times Y by 12 and subtract the result from XY, calling the answer SXY. SXY divided by SXX equals m.

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About the Author

Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the 1980s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics. He holds a Bachelor of Science degree from McGill University.